Complaints spark state hearing on Blue Cross

California has received more than 1,600 complaints from consumers, physicians and hospitals about Blue Cross of California since the state's largest health insurer was acquired by an Indiana firm in 2004, officials said Tuesday.

The state announced plans this week to hold a public hearing in Los Angeles on July 19 on how well Blue Cross has lived up to promises it made nearly three years ago as part of the $21-billion acquisition.

FOR THE RECORDHealth insurance: An article in the Business section on Wednesday misidentified an Assembly bill that would require healthinsurers to justify rate increases. It is AB 1554, not AB 8. The Department of Managed Health Care says it has received complaints from consumers about premium hikes and from physicians about delays and other problems collecting fees.

"We must have assurances that Blue Cross' No. 1 goal is to provide quality healthcare -- not simply to increase its profitability," said Cindy Ehnes, director of the California Department of Managed Health Care.

State officials said they considered the level of complaints troubling but lacked comparable data from before the 2004 takeover of Blue Cross of California's parent, WellPoint Health Networks Inc., by Anthem Inc. The combined company was then called WellPoint Inc.

It is the latest sign that state regulators are stepping up scrutiny of insurers, particularly Blue Cross, a unit of Indianapolis-based WellPoint, which has more than 8 million customers in California.

WellPoint spokeswoman Shannon Troughton said the company would send representatives to the hearing.

"We value our relationship with the Department of Managed Health Care and we'll address any concerns or questions they may have," Troughton said in an e-mail.

The hearing notice is the second dose of bad news in two weeks for the company's California operations.

The Department of Insurance, another California regulator, last week issued a report of an investigation that found BC Life & Health, another WellPoint unit, had revoked 1,880 individual health insurance policies in California in 2004 and 2005, and a review of 83 sample cases cited more than half for alleged violations of fair claims handling laws.

The citations could lead to fines of as much as $10,000 per infraction.

The 2004 deal was criticized at the time because it required an estimated $3.4 billion in debt and because it bestowed payouts to WellPoint executives in California of as much as $600 million.

The combination made the company one of the nation's largest and most profitable health insurers, with net income last year of $3.1 billion on $57 billion in revenue.

State regulators approved the deal on the conditions that WellPoint use no revenue from California policyholder premiums to finance the deal or for executive payouts and that healthcare would not be negatively affected. Those agreements expire at the end of November.

This summer, Blue Cross is imposing fee reductions on physicians at the same time it is sending letters to policyholders notifying them that their premiums are going up because of increasing medical expenses, said Karen Nikos, a spokeswoman for the California Medical Assn., the state's largest physician trade group.

"This is exactly what we said would happen," she said. "This is what happens when you only have a few insurance companies controlling all insurance. They do it because they can."

Regulators also are troubled by a $950-million payment Blue Cross made this spring to WellPoint. The department is investigating whether the payment violates the state's terms for the acquisition.

"The Department of Managed Health Care has been turning up the heat on insurers that have been illegally canceling coverage and are profiting as a result," said Jerry Flanagan, a patient advocate with the Foundation for Consumer and Taxpayer Rights. "It's totally appropriate that they should have to explain their actions in a public hearing."

Flanagan said the department should look into all the fund transfers between Blue Cross in California and out-of-state WellPoint companies.

For example, he said, Blue Cross paid an out-of-state sister company $1.3 billion last year for claims processing. It was earmarked in a regulatory filing as a medical care expense, which inflates the insurer's ratio of healthcare to overhead spending and profit taking, he said.

Other issues on the regulator's radar include Blue Cross' retroactive cancellation of sick patients.

In March, the department announced its intent to fine Blue Cross $1 million after concluding that almost all of the cancellations its investigators examined violated state law.

The financial and healthcare problems for patients whose policies were rescinded have been highlighted in a series of articles in The Times.

The hearing comes amid various healthcare reform efforts in California that could affect the way insurers do business. Several of them stem from the belief that insurers are profiting at policyholders' expense.

One reform measure, AB 8, set to be heard by the state Senate Health Committee today, would require health insurers to justify rate increases as well as profits and transfers to out-of-state companies -- something auto and home insurers already must do. The bill was approved by the Assembly.

A coalition of consumer and labor groups, including AARP and Consumers Union, also Tuesday launched sickofbluecross.com to combat the company's campaign against healthcare overhaul efforts, including Gov. Arnold Schwarzenegger's proposal to require insurers to sell coverage to anyone regardless of medical condition.

"We wanted to make sure there was a place where consumers could realize what Blue Cross' motives are in wanting to stop health reform," said Anthony Wright, executive director of Health Access California, one of the consumer advocacy groups involved in the effort.

Clearly it is Blue Cross' desire, he said, "to continue to be able to deny people coverage because of preexisting conditions and to spend less than 85% on healthcare rather than on profits."

The governor also has proposed mandating that health insurers spend at least 85% of revenue on healthcare as opposed to overhead and profit taking.

The department's hearing announcement posted on its website solicits testimony from the public on a host of issues.

WellPoint's Troughton said the department had "not provided us with a specific list of issues that will be covered during the hearing, so it would be premature to speculate on what those issues may be."

Troughton has said that health insurance remains a competitive industry and does not exhibit excessive profit margins.